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Friday, May 16, 2008

India Inflation May 3 2008

India's inflation rate rose again in the week ended 3 May 2008, to the highest in 3 1/2 years, adding pressure on the central bank to raise borrowing costs further to tame prices. Wholesale prices gained 7.83 percent in the week ended May 3 from a year earlier, after climbing 7.61 percent in the previous week, the government said in a statement in New Delhi. In all probability the rate is now over 8% since today's inflation rate will undoubtedly be revised upwards in two months when India's government reviews the figures after receiving additional price data. The Commerce Ministry today increased the inflation rate for the week ended March 8 to 7.78 percent from 5.92 percent, and this kind of upward revision has been normal in recent weeks.

The price index for fruits, vegetables and other food items rose 0.5 percent in the week ended May 3 from the previous week, while that for manufactured products gained 0.3 percent.

The provisional inflation data based on wholesale price index (WPI) hasn’t crossed the sensitive 8% threshold yet, but the latest revision by a whopping 1.9% points in annual rate of inflation for the week ended March 8 make it not unreasonable to believe that inflation is now well above that mark.

In just two months, the inflation rate has risen by two percentage points - from 5.66% for the week ended February 16 to the present 7.83% for the week ended May 3. Delayed data about the revisions in metals prices among other items were blamed for the spike. The scale of the recent revisions suggests the inflation rate seen since March (the index rose 3.6% points during March-April) will almost certainly be up significantly be even when the final estimates for the month are eventually announced.

The rupee declined on the inflation news since it added to concerns that the central bank will be forced to raise interest rates from a six-year high just as economic growth is slowing. The rupee declined to as low as 42.915 against the dollar, the weakest since April 2007, after the inflation data. The yield on the benchmark 10-year bond rose to 7.95 percent, the highest in more than two weeks.

The central bank on April 29 kept its benchmark repurchase rate, or the overnight lending rate, at 7.75 percent. The government has persuaded steel and cement makers in the past week to cut prices and help slow inflation. India's central bank twice asked lenders to set aside more funds last month, raising the so-called cash reserve ratio to 8.25 percent, the highest since March 2001, from 7.5 percent.

Foreign Exchange Reserves

There has been a visible slowdown in RBI intervention in the forex markets of late. After two consecutive weeks of contraction in reserve accumulation, foreign exchange reserves rose only $200 million to touch $312.7 billion during the week ended May 9. The entire growth in reserves during the week was a result of growth in foreign currency assets.

All other components of reserves — gold, SDR and, reserves with IMF remained unchanged. Of late, though forex assets expressed in dollar terms are slowing down, those expressed in rupee terms continue to show growth. This could be interpreted as meaning that the central bank is accumulating currencies that are depreciating against the dollar.

The Rupee

The rupee declined for the fourth consecutive week this week on concern near-record oil prices will boost the import bill, widening the trade and current-account deficits.

The currency declined as much as 0.5 percent today to a 13- month low as demand for dollars needed to pay for crude oil increased after the commodity climbed to an all-time high of $126.98 per barrel this week. The rupee pared losses on speculation the government will ease curbs on overseas borrowings by companies, allowing more capital inflows.

The rupee weakened 2.2 percent to 42.5075 a dollar this week in Mumbai, adding to last week's 2.3 percent slide, the worst in a decade. It earlier dropped to 42.915, the lowest intraday level since April 12, 2007. The currency's 7.6 percent decline this year now makes the rupee the third- worst performance among the 10 most-traded Asian currencies after the South Korean won and the Thai baht.

The rupee has now fallen 8.1 percent over the past six months as crude oil has advanced 33 percent, boosting the value of India's oil imports to a record $8.6 billion in March. India depends on shipments from abroad to meet approximately three-quarters of its energy needs.

India's trade deficit widened to an all-time high of $25.4 billion in the three months through December, according to the central bank. The current-account shortfall, a measure of trade and investment flows, increased to $5.4 billion in the same quarter from $4.7 billion.

The annual pace of growth in India's industrial production more than halved to 3 percent in March from 8.6 percent in the previous month. The gain was the smallest since February 2002.

1 comment:

Vivek
said...

Very good article.

Commenting, on the ruppee, I would expect the ruppee to decline further, towards the 46 to a dollar mark, or even more, simply because of the hugh trade deficit, along with fiscal deficit that we face.

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